The earnings season is finally upon us, and with it came a rise in volatility. The Vix Index, a measure of market volatility, crossed above 18, still relatively low levels in historic terms, but an increase nonetheless versus the last few weeks. All global indices finished the week in negative territory, with the UK’s FTSE 100 index retracing over -1.5%. In the fixed income market, despite stronger than expected CPI, PPI and retail sales, yields surprisingly contracted, continuing to puzzle both fixed income and equity market participants alike.

Though the earnings season in the US is still in its early stages, those businesses that reported have been reasonably positive.  Of those circa 40 companies, 85% have beaten analyst forecasts on both Earnings per Share (EPS) and sales expectations. However, unless the reported numbers are particularly stellar, the market’s reaction becomes rather muted.  Therefore, it would appear the market  is really looking for knock-out numbers to get excited and had already priced in the expectation for the reporting season.

This is probably not surprising because, despite the slight pullback we have seen, many equity markets are trading at or near their all-time-highs and investors are looking to see whether the marginal demand coming through has been strong enough to offset the marginal costs of re-opening.  Economic trends and the consumer do appear to be in good shape.  After the last 18 months we have had to endure, it is a fair assumption to say people want to get back to some sort of normality, but we cannot be too blasé about where we are at in the fight against the Coronavirus.

The infection numbers remain high in certain parts of the US, and in the UK we have seen a marked pick up. In other areas such as South Africa, the World Health Organisation (WHO) has warned about a surge of infections after days of riots and looting, sparked by the jailing of former President Jacob Zuma, and in Singapore and Australia stark rises in cases have been reported.

Today is dubbed “Freedom Day” in the UK, when the UK Government seeks to end all legal, social and economic restrictions imposed to mitigate the effects of the COVID-19 pandemic. Let us hope this proves the right move to have taken.

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